Economics: Macro

Hoisted from the 2007 Archives: Wow! I had no clue in mid-2007 what was about to come down.

I had no idea of how the money-center universal banks had exposed themselves to housing derivatives, how strongly the right-wing noise machine would lobby against the Federal Reserve's undertaking its proper lender-of-last-resort job, or how hesitant and ineffective the Federal Reserve would turn out to be in the summer and fall of 2008:

How Supply-Side Economics Trickled Down - New York Times: AS one who was present at the creation of “supply-side economics” back in the 1970s, I think it is long past time that the phrase be put to rest. It did its job, creating a new consensus among economists on how to look at the national economy. But today it has become a frequently misleading and meaningless buzzword that gets in the way of good economic policy...

Here in the United States, there were always three arrows to "hysteresis"—to the argument that the failure to adopt policies that properly fought the downturn of 2008-2009 in an aggressive manner to restore full employment rapidly did not just temporary but permanent damage to the economy's productive potential. A long period of very slack demand:

Conference call today at 9:00 PDT/noon EDT on why the Federal Reserve would be very smart to abandon its 2%/year no-lookback inflation target for a less destructive policy framework. The call is to be moderated Shawn Sebastian. Then Josh Bivens will summarize his short whitepaper: “Is 2% Too Low? Rethinking the Fed’s Arbitrary Inflation Target to Avoid Another Great Recession” http://www.epi.org/publication/is-2-percent-too-low/. Jason Furman will talk about the evidence for the fall in the equilibrium Wicksellian neutral rate of interest and the implications of that for optimal monetary policy. I come next. Joe Stiglitz wraps up. And then questions from reporters.

My task today is to set out what the arguments on the other side are—and why we do not find them convincing:

Suppose you had, back in 1992 or 2004 or indeed any other time since 1990 and before 2013, asked a question of Charlie Evans—or, indeed, any of the other non-Neanderthal participants in the Federal Reserve's Federal Open Market Committee meetings. Suppose you had asked whether a 25-54 employment-to-population ratio in the United States of today's 78.5% was anywhere near "full employment". What would they have said?

Hoisted from the Archives: Is Liquidity Enough?https://www.project-syndicate.org/commentary/is-liquidity-enough: Every week more liquidity is injected into the global banking system by the United States Federal Reserve and the European Central Bank. The average interest rate paid for overnight reserves in the US has been well below the 5.25% per year that the Fed still publicly says is its target.

But the market for overnight reserves now appears to be divided into three segments. Banks known to be healthy can borrow at much less than 5.25%. But banks facing possible liquidity problems–which the Fed wants to be able to borrow at 5.25%–are borrowing from the Fed itself at 5.75%, and so are are a few big banks that want more liquidity but don’t believe they could get it without disrupting the market. Such a difference in the prices charged to regulated banks in financial markets is a sign of a potential breakdown.

Live from Intellectual Property Tortuga: $58 for an ebook copy of Alan Blinder: Economic Policy and the Great Stagflationhttp://amzn.to/2pHx5Fv? Come on! It looks like—unless I remember to pick it up sometime in the next week when I swing by Doe—it's dropped off the bibliography list...

...For decades, macroeconomic models assumed that labor and capital took home roughly constant portions of output—labor got just a bit less than two-thirds of the pie, capital slightly more than one-third. Nowadays it’s more like 60-40. Economists are therefore scrambling to explain the change. There are, by my count, now four main potential explanations for the mysterious slide in labor's share. These are: 1) China, 2) robots, 3) monopolies and 4) landlords..."

There is, in my view, a fifth—and a much more likely—possibility: the low-pressure economy.

...But his prime examples of economics malfeasance are, well, terrible.... [The] more or less standard model of macroeconomics when interest rates are near zero [is] IS-LM in some form.... [And] policy had exactly the effects it was “supposed to.” Now, policymakers chose not to believe this.... And yes, some economists gave them cover. But that’s a very different story from the claim that economics failed to offer useful guidance...

Over at Finance and Development: Sluggish Future: You are reading this because of the long, steady decline in nominal and real interest rates on all kinds of safe investments, such as US Treasury securities. The decline has created a world in which, as economist Alvin Hansen put it when he saw a similar situation in 1938, we see “sick recoveries… die in their infancy and depressions… feed on themselves and leave a hard and seemingly immovable core of unemployment…” In other words, a world of secular stagnation. Harvard Professor Kenneth Rogoff thinks this is a passing phase—that nobody will talk about secular stagnation in nine years. Perhaps. But the balance of probabilities is the other way. Financial markets do not expect this problem to go away for at least a generation... Read MOAR at Finance and Development

Q: Libertarian economic theorists tend to believe that trade deficits are of minimal importance. Do these deficits really have a great impact on America's economy?

A: If the president and congress are not doing their job through fiscal policy--regulating government spending and taxing--and the Federal Reserve is not doing its job through monetary policy--regulating the supply and price of liquid purchasing power--in order to maintain full employment, then, yes, a trade deficit can make matters much worse.

Joseph Ford Cotto: Prominent economists and politicians often say that free trade will benefit America in the long run. Many Americans disagree strongly. What is your take on this situation?

Dr. J. Bradford DeLong: Well, typically and roughly, the average import we buy from other countries we get for 30% off--we use foreign currency that costs us $1.40 to purchase goods and services made abroad that would cost us $2.00 worth of time, energy, resources and cash to make at home.

Over at Finance and Development: Sluggish Future: You are reading this because of the long, steady decline in nominal and real interest rates on all kinds of safe investments, such as US Treasury securities. The decline has created a world in which, as economist Alvin Hansen put it when he saw a similar situation in 1938, we see “sick recoveries… die in their infancy and depressions… feed on themselves and leave a hard and seemingly immovable core of unemployment…” In other words, a world of secular stagnation. Harvard Professor Kenneth Rogoff thinks this is a passing phase—that nobody will talk about secular stagnation in nine years. Perhaps. But the balance of probabilities is the other way. Financial markets do not expect this problem to go away for at least a generation... Read MOAR at Finance and Development

The United States had an immense boom in the 1990s. That was in the end financial disappointing for those who invested in it, but not because the technologies they were investing in did not pan out as technologies, not because the technologies deliver enormous amounts of well-being to humans, but because it turned out to be devil's own task to monetize any portion of the consumer surplus generated by the provision of information goods.

Project Syndicate:Trade Deals and Alternative Facts: BERKELEY – In a long recent Vox essay outlining my thinking about US President Donald Trump’s emerging trade policy, I pointed out that a “bad” trade deal such as the North American Free Trade Agreement is responsible for only a vanishingly small fraction of lost US manufacturing jobs over the past 30 years. Just 0.1 percentage points of the 21.4 percentage-point decline in the employment share of manufacturing during this period is attributable to NAFTA, enacted in December 1993.

A half-century ago, the US economy supplied an abundance of manufacturing jobs to a workforce that was well equipped to fill them. Those opportunities have dried up. This is a significant problem: a BIGLY problem. But anyone who claims that the collapse of US manufacturing employment resulted from “bad” trade deals like NAFTA is playing the fool. Read MOAR at Project Syndicate

At Milken Review: Helicopter Money: When Zero Just Isn't Low Enough: If you pay much attention to the chattering classes — those who chatter about economics, anyway — you've probably run across the colorful term "helicopter money." At root, the concept is disarmingly simple. It's money created at the discretion of the Federal Reserve (or any central bank) that could be used to increase purchasing power in times of recession. But the controversy over helicopter money (formally, money-financed fiscal policy) is hardly straightforward... Read MOAR at Milken Review

The Devil We Sort of Know: Adair Turner's book http://amzn.to/29VqW1z has, I believe, at its core an argument that I trace to John Maynard Keynes : that we are approaching the age of the euthanasia of the rentier.

Barry Eichengreen (2008): Globalizing Capital: A History of the International Monetary System (Princeton: Princeton University Press: 0691139377) http://amzn.to/2kG1v57

Chapter 1: Introduction: Six Questions:

In what sense is the international monetary system key "glue" for the cross-country global division of labor?

What are "international capital markets"?

What is the connection between flexibility of exchange rates and the magnitude of international capital flows?

Why does the standard explanation of the development of the international monetary system—in terms of a steadily increasing tide of globalization in response to falling transport and communication costs—simply not work?

Why does Eichengreen divide the period from 1850 into five different "régimes"? What themes are common across two or more of these "régimes"? What these are different?

How have governments' objectives with respect to the international monetary system changed over the past nearly two hundred years?

"Network externalities." What are they? Why are they important?

What did Karl Polanyi write back in 1944? Why is it important? Why is it more important now than it was when Barry began working on this book in the 1990s?

Of the five great Eurasian Empires--Russia, China, Mughal India, Safavid Persia, and Ottoman Turkey--which did best at coping with the opportunities and problems opened up in the course of world history after 1500?

According to Allen, none of the five were going to industrialize--that required (a) engrossing a very large share of the gains from globalization coupled with (b) cheap coal and (c) a cutting-edge engineering culture. But why were they not more successful at commercializing?

What needed to happen for an empire to keep its substantial political independence in the face of the rise of Western Europe?

What is the "short list" of candidates that are major causes for both the origins and the persistence of deep relative poverty in sub-Saharan Africa?

Allen attributes a lot of early African underdevelopment to relatively low population density. What, according to Allen, kept population density low in West Africa? In East Africa? In South Africa?

West Africa saw major medieval empires--Ghana, Mali, Songhay. How does their existence square with Allen's story? Why, in Allen's view, were they not or why did they not trigger the growth of what Allen calls "advanced agricultural civilizations"?

East Africa had a great deal of contact with the advanced agricultural civilizations of the Indian Ocean basin for a very long time. Why, in Allen's view, did that not trigger the development of what Allen calls "advanced agricultural civilizations"?

Allen thinks that Africa's poverty today was "baked in the cake" as of 1500--that the "social and economic structure of 1500... determined how the continent responded to globalization and imperialism, and those responses have kept it poor since..." Is this true? How could we find out whether this is true or not?

Africa developed major exports in the late-nineteenth century--cocoa, oils, precious metals, copper and other metals, coffee, and others. After World War II Zambia was richer and more developed than Portugal. What factors, according to Allen, turned those moves toward export-oriented development that African economies undertook into a trap?

What was the "standard model" of 19th century catch-up industrialization? Which countries were able to adopt it successfully? Which were not?

Why did the standard model become less and less adequate as a tool for catch-up industrialization as the 19th century gave way to the 20th?

Why did the standard model not work well in Latin America?

Why did the standard model not work well in Eastern Europe?

Japan was the only country not rich in 1870 that, until well after World War II, could in any sense claim to have joined the rich economies of the (extended) North Atlantic as far as its state of economic development was concerned. Why was Japan unique?

Here it is: Technology has driven our manufacturing share of non-farm employment down from 30% to 12%. Lousy macroeconomic policies--Reagan and Bush 43's generation of large wrong-time government deficits, an inappropriate overly strong dollar policy kept long past its sell-by date, etc--further pushed it down from 12% to 9%. Our assisting in the extraordinarily rapid industrialization of China from 9% to 8.7%. NAFTA from 8.7% to 8.6%. And given all the benefits we have gotten from NAFTA--and the much bigger ones Mexico has gotten--NAFTA was a good (albeit small) deal for the U.S.

Note to Self: I always find it interesting that Friedman and the monetarists formulated money demand as a function of income rather than of private spending, or even of private consumption spending. You don't need or want money when your income is high, unless you want to spend it.

From left and right alike we hear something called "globalization" condemned. The forces driving the world economy toward increased economic integration are sinister. On the left politicians like Democratic congressman David Bonior begin speeches by noting three things that come to the U.S. from Mexico--dirty trucks, drugs, and hepatitis. On the right politicians like ex-Republican Pat Buchanan blame a century-old conspiracy to deliver America into the hands of the international bankers--and somehow to Buchanan the bankers are always named Goldman, Sachs, or Rubin; never Morgan or Baker.

Not running the table in January 2009 to make a V-shaped recovery all but inevitable, but instead trusting to good luck and the accuracy of the forecast. An obvious mistake then. An obvious mistake now. And I have never heard a good account of why it was made--other than that Obama, Emmanuel, Plouffe, and Axelrod bonded with Geithner, and that Geithner is always "let's do less", no matter how strong the arguments to do more are:

...Panelist(s): Bradford DeLong, University of California-Berkeley; Han Despin, Nichols College; William Lazonick, University of Massachusetts-Lowell; Deirdre McCloskey, University of Illinois-Chicago; Anwar Shaikh, New School...

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With each passing day Donald Trump looks more and more like Silvio Berlusconi: bunga-bunga governance, with a number of unlikely and unforeseen disasters and a major drag on the country--except in states where his policies are neutralized.

Nevertheless, remember: WE ARE WITH HER!

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